blgo20160630_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended June 30, 2016.

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from              to             

Commission File Number 000-19709

 


 BIOLARGO, INC.

(Exact name of registrant as specified in its charter) 

 

 

     

Delaware

 

65-0159115

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3500 W. Garry Avenue

Santa Ana, California 92704

(Address, including zip code, of principal executive offices)

 

(949) 643-9540

(Registrant’s telephone number, including area code)

 


  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒ No      ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ☐                    Accelerated filer ☐

 

Non-accelerated filer       ☐                   Smaller reporting company ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

The number of shares of the Registrant’s Common Stock outstanding as of August 4, 2016 was 87,081,254 shares.

 

 
 

 

 

BIOLARGO, INC.

FORM 10-Q

INDEX

 

PART I
     

Item 1

Financial Statements

 1
     

Item 2

Management’s Discussion and Analysis and Financial Condition and Results of Operations 

 15
     

Item 4

Controls and Procedures

 26
     
PART II
   
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds  27
     
Item 6 Exhibits  28
     
  Signatures 28

  

 

Exhibit Index 

          4.1* Form of One-Year Convertible Promissory Note

          4.2* Form of Five-Year Stock Purchase Warrant (issued with One-Year Convertible Note)

          4.3* Line of Credit issued June 2016
          4.4* Stock purchase warrant issued with Line of Credit in June 2016

Exhibit 31.1*

Exhibit 31.2*

Exhibit 32**

 

101.INS**

XBRL Instance

 

 

101.SCH**

XBRL Taxonomy Extension Schema

 

 

101.CAL**

XBRL Taxonomy Extension Calculation

 

 

101.DEF**

XBRL Taxonomy Extension Definition

 

 

101.LAB**

XBRL Taxonomy Extension Labels

 

 

101.PRE**

XBRL Taxonomy Extension Presentation

 

* Filed herewith

** Furnished herewith

 

(1)

Incorporated herein by reference from the Form 10-K filed by the Company for the year ended December 31, 2015.

 

 
i. 

 

  

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2015 AND JUNE 30, 2016

 

   

DECEMBER

31, 2015

   

JUNE

30, 2016

(Unaudited)

 

Assets

 

Current assets:

               

Cash and cash equivalents

  $ 1,763,114     $ 889,029  

Accounts receivable

    41,431       46,706  

Inventories

    37,435       23,880  

Prepaid expenses and other current assets

    49,167       43,920  

Total current assets

    1,891,147       1,003,535  
                 

Equipment, net of depreciation

          5,385  

Other non-current assets, net of amortization

    19,157       13,697  

Total assets

  $ 1,910,304     $ 1,022,617  
                 
                 

Liabilities and stockholders’ equity (deficit)

 

Current liabilities:

               

Accounts payable and accrued expenses

  $ 324,983     $ 311,144  

Deposits

    135,000       100,000  

Total current liabilities

    459,983       411,144  
                 

Long-term liabilities:

               

Convertible notes payable

    3,245,972       3,780,972  

Line of credit

          300,000  

Discount on convertible notes payable and line of credit

    (2,937,019 )     (3,041,167 )

Total liabilities

    768,936       1,450,949  
                 

COMMITMENTS, CONTINGENCIES (Note 9)

               
                 

STOCKHOLDERS’ EQUITY (DEFICIT):

               

Convertible Preferred Series A, $.00067 Par Value, 50,000,000 Shares Authorized, -0- Shares Issued and Outstanding, at December 31, 2015 and June 30, 2016, respectively.

           

Common stock, $.00067 Par Value, 200,000,000 Shares Authorized, 85,648,015 and 87,081,254 Shares Issued, at December 31, 2015 and June 30, 2016, respectively.

    57,236       58,186  

Additional paid-in capital

    84,410,821       86,162,823  

Accumulated deficit

    (84,075,695 )     (87,266,592 )

Accumulated other comprehensive loss

    (40,567 )     (50,491 )

Non-controlling interest (Note 8)

    789,573       667,742  

Total stockholders’ equity (deficit)

    1,141,368       (428,332 )

Total liabilities and stockholders’ equity

  $ 1,910,304     $ 1,022,617  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
1

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX-MONTHS ENDED JUNE 30, 2015 AND 2016

(UNAUDITED)

 

   

THREE-MONTHS

   

SIX-MONTHS

 
   

JUNE

30, 2015

   

JUNE

30, 2016

   

JUNE

30 2015

   

JUNE

30, 2016

 
                                 
                                 

Revenues

  $ 15,611     $ 38,986     $ 29,486     $ 52,928  

Cost of revenues

    (7,683 )     (15,757 )     (14,064 )     (21,838 )

Gross profit

    7,928       23,229       15,422       31,090  
                                 

Selling, general and administrative expenses

    859,268       923,564       1,419,793       1,854,471  

Research and development

    167,211       329,968       305,210       681,018  

Amortization and depreciation

    2,730       2,845       5,460       5,575  

Operating loss

    (1,021,281 )     (1,233,148 )     (1,715,041 )     (2,509,974 )
                                 

Other (expense) income:

                               

Interest expense

    (302,919 )     (478,525 )     (317,073 )     (884,850 )

Grant income

    24,232       43,338       37,028       82,096  

Net loss

    (1,299,968 )     (1,668,335 )     (1,995,086 )     (3,312,728 )
                                 

Net loss attributable to noncontrolling interest

    (5,588 )     (54,859 )     (11,344 )     (121,831 )

Net loss attributable to common shareholders

  $ (1,294,380 )   $ (1,613,476 )   $ (1,983,742 )   $ (3,190,897 )
                                 
                                 

Net loss per share attributable to common shareholders:

                               

Loss per share attributable to shareholders – basic and diluted

  $ (0.02 )   $ (0.02 )   $ (0.02 )   $ (0.04 )

Weighted average number of common shares outstanding:

    83,400,950       86,419,573       83,188,527       86,133,395  
                                 

Comprehensive loss attributable to common shareholders:

                               

Net loss

  $ (1,299,968 )   $ (1,668,335 )   $ (1,995,086 )   $ (3,312,728 )

Foreign currency translation

          (606 )           (9,924 )

Comprehensive loss

    (1,299,968 )     (1,668,941 )     (1,653,711 )     (3,322,652 )
                                 

Comprehensive loss attributable to noncontrolling interest

    (5,588 )     (54,859 )     (11,344 )     (121,831 )

Comprehensive loss attributable to common shareholders

  $ (1,294,380 )   $ (1,614,082 )   $ (1,983,742 )   $ (3,200,821 )

 

See accompanying notes to unaudited consolidated financial statements.

 

 
2

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE SIX-MONTHS ENDED JUNE 30, 2016

(UNAUDITED)

 

          Additional          

Accumulated

   

Non-

         
   

Common stock

   

 paid-in

   

Accumulated

   

other comprehensive

   

controlling

         
   

Shares

   

Amount

   

capital

   

deficit

   

loss

   

interest

   

Total

 

Balance, December 31, 2015

    85,648,015     $ 57,236     $ 84,410,821     $ (84,075,695 )   $ (40,567 )   $ 789,573     $ 1,141,368  

Issuance of common stock to vendors and interest to note holders

    1,433,239       950       488,157                         489,107  

Stock option compensation expense

                491,440                         491,440  

Fair value of warrants and conversion feature issued as discount on convertible notes payable and line of credit

                772,405                         772,405  

Net loss

                      (3,190,897 )           (121,831 )     (3,312,728 )

Foreign currency translation

                            (9,924 )           (9,924 )

Balance, June 30, 2016

    87,081,254     $ 58,186     $ 86,162,823     $ (87,266,592 )   $ (50,491 )   $ 667,742     $ (428,332 )

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 
3

 

 

BIOLARGO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX-MONTHS ENDED JUNE 30, 2015 AND 2016

(UNAUDITED)

 

   

JUNE

30, 2015

   

JUNE

30, 2016

 

Cash flows from operating activities

               

Net loss

  $ (1,995,086 )   $ (3,312,728 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Stock option compensation expense

    249,700       491,440  

Common stock issued for interest and in lieu of salary to officers and fees for services from consultants

    603,687       489,107  

Interest expense related to amortization of the discount on convertible notes payable and line of credit and deferred financing costs

    262,267       668,257  

Amortization and depreciation expense

    5,460       5,575  

Changes in assets and liabilities:

               

Accounts receivable

    (1,939 )     (5,275 )

Inventories

    10,913       13,555  

Prepaid expenses and other current assets

          5,247  

Accounts payable and accrued expenses

    (43,074 )     (13,839 )

Deposits

          (35,000 )

Net cash used in operating activities

    (813,362 )     (1,693,661 )

Cash flows from investing activities

               

Equipment purchase

          (5,500 )

Net cash used in investing activities

          (5,500 )
                 

Cash flows from financing activities

               

Proceeds from convertible notes

    788,000       535,000  

Proceeds from letter of credit

          300,000  

Payment of financing costs

    (22,150 )      

Net cash provided by financing activities

    755,850       835,000  
                 

Net effect of foreign currency translation

          (9,924 )

Net change in cash

    (57,512 )     (874,085 )

Cash at beginning of year

    154,460       1,763,114  

Cash at end of period

  $ 96,948     $ 889,029  

Supplemental disclosures of cash flow information

               

Cash paid during the year for:

               

Interest

  $ 9,400     $  

Income taxes

  $ 4,000     $ 4,000  
                 

Non-cash investing and financing activities

               

Fair value of warrants issued in conjunction with convertible notes and letter of credit

  $ 954,039     $ 772,405  
                 

 

 

See accompanying notes to unaudited consolidated financial statements

 

 
4

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1. Business and Organization

 

Outlook

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the accompanying consolidated financial statements, we had a net loss of $3,312,728, and cash used in operations of $1,693,661, for the six-months ended June 30, 2016, and at June 30, 2016, we had working capital of $592,391, current assets of $1,003,535, and an accumulated stockholders’ deficit of $87,266,592. The foregoing factors raise substantial doubt about our ability to continue as a going concern. Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

We have been, and anticipate that we will continue to be, limited in terms of our capital resources. Our total cash balance was $889,029 at June 30, 2016. We had revenues of $52,928 in the six-months ended June 30, 2016, which amount was not sufficient to fund our operations. We generally have not had enough cash or sources of capital to pay our accounts payable and expenses as they arise, and have relied on the issuance of stock options and common stock, as well as extended payment terms with our vendors, to continue to operate. We will be required to raise substantial additional capital to expand our operations, including without limitation, hiring additional personnel, additional scientific and third-party testing, costs associated with obtaining regulatory approvals and filing additional patent applications to protect our intellectual property, and possible strategic acquisitions or alliances, as well as to meet our liabilities as they become due for the next 12 months.

 

As of June 30, 2016, we had $3,795,502 principal and interest amount outstanding due on convertible notes payable (see Note 4) that are payable into shares of our common stock at our option on the June 1, 2018 maturity date. We also had $303,551 principal and interest amount outstanding due on letter of credit (see Note 4) that are payable December 1, 2017. Additionally, we had $293,063 of accounts payable and accrued expenses (see Note 7).

 

The unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to Rule 8-03 of Regulation S-X under the Securities Act of 1933, as amended. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements and notes should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2016.

 

We operate five wholly-owned subsidiaries: BioLargo Life Technologies, Inc., organized under the laws of the State of California in 2006, Odor-No-More, Inc., organized under the laws of the State of California in 2009, BioLargo Water USA, Inc., organized under the laws of the State of California in 2013, BioLargo Water, Inc., organized under the laws of Canada in 2014, BioLargo Maritime Solutions, Inc. organized under the laws of the State of California in 2016, and BioLargo Development Corp., organized under the laws of the State of California in 2016. Additionally, we are majority owner of Clyra Medical Technologies, Inc., organized under the laws of the State of California in 2012

 

 
5

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 2. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany accounts and transactions have been eliminated.

 

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for stock-based compensation and financing transactions, uncollectible accounts receivable, asset impairment and amortization, and taxes, among others.

 

The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results of our financial statements.  

 

 

Share-based Payments

 

All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their fair values.

 

For stock issued to consultants and other non-employees for services, we record the expense based on the fair market value of the securities as of the date of the stock issuance. The issuance of fully vested stock warrants or options to non-employees are valued at the time of issuance utilizing the Black Scholes calculation and the amount is charged to expense. The issuance of stock warrants or options to non-employees that vest over time are revalued each reporting period until vested to determine the amount to be recorded as an expense in the respective period. As the warrants or options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting.

 

Non-Cash Transactions

 

We have established a policy relative to the methodology to determine the value assigned to each intangible we acquire, and/or services or products received for non-cash consideration of our common stock. The value is based on the market price of our common stock issued as consideration, at the date of the agreement of each transaction or when the service is rendered or product is received.

 

Foreign Currency

 

The Company has designated the functional currency of Biolargo Water, Inc., our Canadian subsidiary, to be the Canadian dollar. Therefore, translation gains and losses resulting from differences in exchange rates are recorded in accumulated other comprehensive loss.

 

Revenue Recognition

 

Revenues are recognized as risk and title to products transfers to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. We also may generate revenues from royalties and license fees from our intellectual property. Licensees typically pay a license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property. License fees are recognized over the estimated period of future benefit to the average licensee.

 

 
6

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Government Grants

 

We have been awarded grants from the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP) and the National Science and Engineering Research Council of Canada (NSERC). The government grants received are considered other income and are included in our consolidated statements of operations. We received our first grant in 2015 and have been awarded eleven grants in the totaling approximately $900,000. Some of the funds from these grants are given directly to third parties (such as the University of Alberta) to support research on our technology. The grants have terms generally ranging between six and eighteen months and support a majority, but not all of the related research budget costs. This cooperative research allows us to utilize (i) a depth of resources and talent to accomplish highly skilled work, (ii) financial aid to support research and development costs, (iii) independent and credible validation of our technical claims.

  

The grants provide for (i) recurring monthly amounts and (ii) reimbursement of costs for research talent for which we invoice to request payment and (iii) ancillary cost reimbursement for research talent travel related costs. All awarded grants have specific requirements on how the money is spent, typically to employ researchers. None of the funds may be used for general administrative expenses or overhead in the United States. These grants have substantially increased our level of research and development activities in Canada and the development of our AOS filter. We continue to apply for Canadian government and agency grants to fund research and development activities. Not all of our grant applications have been awarded, and no assurance can be made that any pending grant application, or any future grant applications, will be awarded.

 

Earnings (Loss) Per Share

 

We report basic and diluted earnings (loss) per share (“EPS”) for common and common share equivalents. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if stock options and warrants were exercised into common stock. For the three and six-months ended June 30, 2015 and 2016, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of the warrants and stock options on the Company’s net loss.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update change existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this standard.

 

 
7

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 3. Deposits

 

Royalty Revenue

 

In 2012, we executed a joint venture agreement with Peter Holdings Pty. Ltd., the principal developer of the Isan System, whereby we jointly purchased the intellectual property associated with the Isan System, and agreed to share any royalties from any licensing revenue generated from the Isan System on an equal 50/50 basis. 

 

In February 2014, we received a deposit of $100,000 from InsulTech Manufacturing, LLC, an Arizona limited liability company d/b/a Clarion Water (“Clarion Water”) towards a worldwide, exclusive license of the Isan System. On August 12, 2014, we entered into a license agreement with Clarion Water in which we granted an exclusive license to commercialize the Isan System for a term expiring the latter of 10 years or upon the expiration of the licensed patents. The license agreement provides that the $100,000 deposit is non-refundable, and is to be credited to future payments of royalties or sublicense fees due under the license agreement. The agreement further provides for a 10% royalty of licensee’s “net sales revenue”, and 40% of sublicensing fees. Licensee is required to make minimum payments beginning July 1, 2016, of $50,000 per quarter, and we are obligated to share any revenues under the agreement on an equal basis with Peter Holdings Pty. Ltd. The intellectual property subject to the license agreement includes all intellectual property related to the Isan System, including all patents, trademarks, proprietary knowledge, and other similar know-how or rights relating to or arising out of the Isan System or the patents related to the Isan System. The agreement contains other terms and conditions typically found in intellectual property license agreements.

 

 

Note 4. Convertible Promissory Notes, Line of Credit and Notes

 

   

DECEMBER

31, 2015

   

JUNE

30, 2016

 

Convertible promissory notes, 12% interest, matures June 1, 2018

  $ 3,245,972     $ 3,780,972  

Line of credit, 18% interest, matures December 1, 2017

          300,000  

Total

  $ 3,245,972     $ 4,080,972  

 

For the three and six-months ended June 30, 2015, we recorded $302,919 and $317,075 and for the three and six-months ended June 30, 2016, we recorded $478,525 and $884,850 of interest expense related to the amortization of the discount on our convertible notes payable and interest expense related to our outstanding convertible promissory notes and line of credit.

 

2015 Unit Offering

 

 On January 15, 2015, we commenced a private securities offering of “units”, each Unit consisting of a convertible promissory note and Series A stock purchase warrant (“2015 Unit Offering”). The price and availability of the Units are set forth in a “Pricing Supplement” issued from time-to-time, and priced up to a 30% discount to the market price of the Company’s common stock. Each note is convertible into the Company’s common stock at the Unit price. The Offering is subject to an over-allotment of 20%, or an additional $1,000,000 in Units, for an aggregate total of $6,000,000, and shall be known as the Company’s “2015 Unit Offering.” Because more than $3,000,000 has been invested, the Company is obligated to register the common shares underlying the notes and warrants (“Shares”) with the Securities and Exchange Commission.

 

We have issued four “pricing supplements” setting forth the conversion price of the note, as well as the warrant price, as follows:

 

Pricing Supplement

 

Conversion

Price

   

Warrant

Exercise Price

   

Aggregate

Investments

 

No. 1

  $ 0.25     $ 0.40     $ 460,000  

No. 2

  $ 0.25     $ 0.45     $ 1,100,000  

No. 3

  $ 0.35     $ 0.45     $ 1,546,713  

No. 4

  $ 0.35     $ 0.45     $ 100,000  
                    $ 3,206,713  

 

 

 
8

 

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

During the three and six-months ended June 30, 2015, we received $415,000 and $778,000 of aggregate investments in the 2015 Unit Offering, and during the three and six-months ended June 30, 2016, we received $280,000 and $535,000, respectively.

 

Interest due will be paid quarterly in arrears in cash or shares of common stock. If paid by the issuance of common stock, interest is paid at a conversion price equal to the average closing price of the Company’s common stock over the 20 trading days prior to the interest payment due date. The principal amount of the note may be paid by the issuance of shares of common stock, or cash, upon maturity at the Company’s election. When paid in shares, the number of shares to be issued shall be calculated by dividing the principal amount invested by the Unit price, as it is established at the time of the original investment by the applicable Pricing Supplement. The notes may be converted at any time by the investor, at maturity by the Company, or by the Company prior to maturity, so long as all of the following conditions are met: (i) the Shares issued as payment are registered with the SEC, (ii) the Company’s common stock closes for ten consecutive trading days at or above three times the Unit price.

 

Each investor, for no additional consideration, received a Series A stock purchase warrant. (See Note 6).

Each Series A warrant allows for the purchase of the number of common shares equal to the investment amount divided by the Unit price, (e.g., one warrant share for each share of common stock which the investor is eligible to receive through conversion of his original convertible note) and, the warrant will have an exercise price as set forth in the Pricing Supplement. Each Series A warrant expires June 1, 2020. The Company may “call” the Series A warrant, requiring the investor to exercise the warrant within 30 days or forever lose the rights to do so, only if the following conditions have been met: (i) the underlying Shares are registered with the SEC, and (ii) the Company’s common stock closes for ten consecutive trading days at or above two times the exercise price.

 

Line of Credit

 

On June 6, 2016, we received $300,000 pursuant to a line of credit, accruing interest at a rate of 18% per annum, for which we have pledged our inventory and accounts receivable as collateral. The line of credit may be repaid following six-months from the date of issuance or at the maturity date December 1, 2017.

 

Each investor, for no additional consideration, received a warrant to purchase our common stock. (See Note 6). The warrant allows for the purchase of the number of common shares equal to the investment amount. (e.g., one warrant share for each dollar invested).

 

December/January Notes

 

In January 2015, we received $133,000 and issued unsecured convertible promissory notes each with a one-year maturity date, which accrue interest at a rate of 12% per annum. Each noteholder, for no additional consideration, received a stock purchase warrant exercisable at $0.30 per share, which expires January 2018. (See Note 6).

 

The funds received as part of our December/January Notes totaled $333,000, all of which converted into terms of the 2015 Unit Offering during the second and third quarters of 2015. 

 

 

Note 5. Stockholders’ Equity

 

Preferred Stock

 

Our certificate of incorporation authorizes our Board of Directors to issue preferred stock, from time to time, on such terms and conditions as they shall determine. As of December 31, 2015 and June 30, 2016 there were no outstanding shares of our preferred stock.

 

 
9

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Common Stock 

 

During the six-months ended June 30, 2015 and 2016, we issued 799,825 and 824,581 shares of common stock in lieu of cash for salaries to officers and fees for service provided by consultants, resulting in a weighted-average grant date fair value of $292,825 and $275,232, respectively, which is recorded in selling general and administrative expense.

 

During the six-months ended June 30, 2016, we issued 608,658 shares of common stock resulting in a grant date fair value of $213,875, to settle our accrued interest liability from our 2015 Unit Offering. There were no shares issued for accrued interest during the six-months ended June 30, 2015.

 

Share-Based Compensation

 

During the six-months ended June 30, 2015 and 2016, we recorded an aggregate $700,655 and $491,440 in selling general and administrative expense related to the issuance of stock options. We issued options through our 2007 Equity Incentive Plan and outside of our 2007 Equity Incentive Plan.

 

2007 Equity Incentive Plan

 

On August 7, 2007, and as amended April 29, 2011, our Board of Directors adopted the BioLargo, Inc. 2007 Equity Incentive Plan (“2007 Plan”) as a means of providing our directors, key employees and consultants additional incentive to provide services. Both stock options and stock grants may be made under this plan. The Board’s Compensation Committee administers this plan. The plan allows grants of common shares or options to purchase common shares. As plan administrator, the Compensation Committee has sole discretion to set the price of the options. The Compensation Committee may at any time amend or terminate the plan. The term of the options may be up to 10 years.

 

On June 20, 2016, we recorded the issuance of options to purchase an aggregate 40,000 shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an annual automatic issuance. The exercise price of $0.45 equals the price of our common stock on the grant date. The fair value of these options totaled $18,000 and was recorded as selling, general and administrative expense.

 

On March 21, 2016, our Board of Directors extended by five years the expiration of options to purchase 307,777 shares of our common stock issued to our Board of Directors and vendors in March 2011. The options were originally issued in exchange for unpaid obligations and now expire on March 21, 2021. The weighted-average fair value of the options resulted in additional $119,971 of selling, general and administrative expenses.

 

On June 24, 2015, we recorded the issuance of options to purchase an aggregate 40,000 shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an annual automatic issuance. The exercise price of $0.38 equals the price of our common stock on the grant date. The fair value of these options totaled $15,200 and was recorded as selling, general and administrative expense.

 

Activity for our stock options under the 2007 Plan for the six-months ended June 30, 2015 and 2016 is as follows:

 

Balance, June 30, 2015:   Options     Shares     Exercise    

Weighted

Average

Price per

 

 

 

Outstanding

   

Available

   

Price per share

   

share

 

Balances as of December 31, 2014

    8,601,086       3,398,914       $0.23 1.89     $ 0.44  

Granted

    940,000       (940,000

)

    0.38 0.58        

Expired

    (200,000

)

    200,000         0.58         0.58  

Balance, June 30, 2015

    9,341,086       2,658,914       $0.23 1.89     $ 0.43  

 

 

 
10

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

                               

Weighted

 
                               

Average

 

Balance, June 30, 2016:

 

Options

   

Shares

   

Exercise

   

Price per

 
   

Outstanding

   

Available

   

Price per share

   

share

 

Balances as of December 31, 2015

    10,241,086       1,758,914       $0.22 1.89     $ 0.44  

Granted

    40,000       (40,000

)

      0.45         0.45  

Exercised

                             

Balance, June 30, 2016

    10,281,086       1,718,914       $0.22 1.89     $ 0.44  

 

 

Options issued Outside of the 2007 Equity Incentive Plan

 

During the six-months ended June 30, 2016, we issued options to purchase 484,077 shares of our common stock at exercise prices ranging between $0.33 – $0.45 per share to vendors and to our members of our board of directors, in lieu of 188,451 in accrued and unpaid fees. The weighted-average fair value of these options totaled $183,159 and is recorded as selling, general and administrative expenses.

 

During the six-months ended June 30, 2015, we issued options to purchase 1,463,818 shares of our common stock at exercise prices ranging between $0.33 – $0.36 per share to vendors and to our members of our board of directors, in lieu of $398,150 in accrued and unpaid fees. The weighted-average fair value of these options totaled $529,364 and is recorded as selling, general and administrative expenses.

 

The grant-date fair value of the previously issued options that vested during the six-months ended June 30, 2015 and 2016 was $156,091 and $170,310, respectively.

 

Activity of our stock options issued outside of the 2007 Plan for the six-months ended June 30, 2015 and 2016 is as follows:

 

                       

Weighted

 

Balance, June 30, 2015:

                     

Average

 
   

Options

   

Exercise

   

Price per

 
   

Outstanding

   

Price per share

   

share

 

Balance, December 31, 2014

    17,965,291       $0.18 1.00     $ 0.40  

Granted

    1,463,818       0.34 0.36       0.35  

Expired

                     

Balance, June 30, 2015

    19,429,109       $0.18 1.00     $ 0.40  

 

                       

Weighted

 
                       

Average

 

Balance, June 30, 2016:

 

Options

   

Exercise

   

Price per

 
   

Outstanding

   

Price per share

   

share

 

Balance, December 31, 2015

    19,394,975       $0.18 1.00     $ 0.40  

Granted

    484,077       0.33 0.45     $ 0.38  

Exercised

    (60,000

)

      0.25         0.25  

Balance, June 30, 2016

    19,819,052       $0.18  1.00     $ 0.41  

  

 
11

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

We recognize compensation expense for stock option awards on a straight-line basis over the applicable service period of the award, which is the vesting period. Share-based compensation expense is based on the grant date fair value estimated using the Black-Scholes Option Pricing Model. The following methodology and assumptions were used to calculate share based compensation for the six-months ended June 30:

 

   

2015

   

2016

 
   

Non Plan

   

2007 Plan

   

Non Plan

   

2007 Plan

 

Risk free interest rate

    1.83 2.23%

 

    1.62 2.38%

 

    1.77 1.91%

 

    1.26 1.36%

 

Expected volatility

    807 821%

 

    326 807%

 

    641 645%

 

    311 315%

 

Expected dividend yield

                                       

Forfeiture rate

                                       

Expected life in years

      7         7         7           5    

 

Expected price volatility is the measure by which our stock price is expected to fluctuate during the expected term of an option. Expected volatility is derived from the historical daily change in the market price of our common stock, as we believe that historical volatility is the best indicator of future volatility.

 

The risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S Treasury yield as determined by the U.S. Federal Reserve. We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future.

 

Historically, we have not had significant forfeitures of unvested stock options granted to employees and Directors. A significant number of our stock option grants are fully vested at issuance or have short vesting provisions. Therefore, we have estimated the forfeiture rate of our outstanding stock options as zero.

 

Note 6. Warrants

 

2015 Unit Offering Warrants

 

During the six-months ended June 30, 2015 and 2016, pursuant to the terms of our 2015 Unit Offering (see Note 4), we issued warrants to purchase up to an aggregate 2,732,800 and 1,528,571 shares of our common stock at an exercise price of $0.40 and $0.45 per share, respectively. These warrants were issued to investors and as commissions, and are set to expire June 1, 2020.

 

During the six-months ended June 30, 2015 and 2016, the intrinsic and relative fair value of these warrants resulted in $645,000 and $535,000, respectively, recorded as a discount on our convertible notes on our consolidated balance sheets in the periods presented.

 

Warrants Issued Concurrently with Line of Credit

 

During the six-months ended June 30, 2016 we issued warrants to purchase an aggregate 300,000 shares of our common stock. These warrants are exercisable at $0.35 per share and expire June 2021. The intrinsic and relative fair value of warrants issued resulted in $237,405 discount on the letter of credit.

 

 

Warrants Issued Concurrently with December/January Notes

 

During the six-months ended June 30, 2015 we issued warrants to purchase an aggregate 266,000 shares of our common stock. These warrants are exercisable at $0.30 per share and expire January 2020. The intrinsic and relative fair value of warrants issued in the six-months ended June 30, 2015 resulted in $133,000 discount on the note payables.

 

We recorded $247,348 and $668,257 of interest expense related to the amortization of the discount on convertible notes, line of credit, deferred financing fees and for the extension of warrants set to expire during the six-months ended June 30, 2015 and 2016, respectively.

 

 
12

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

We have certain warrants outstanding to purchase our common stock, at various prices, as summarized in the following tables:

 

Balance, June 30, 2015

 

Number of

             
   

Shares

   

Price Range

 

Outstanding as of December 31, 2014

    8,838,122       $0.125 1.00  

Issued

    1,501,900       0.30 0.75  

Expired

               

Outstanding as of June 30, 2015

    10,340,022       $0.125 1.00  

 

Balance, June 30, 2016

 

Number of

             
   

Shares

   

Price Range

 

Outstanding as of December 31, 2015

    13,779,438       $0.125 1.00  

Issued

    1,828,571         0.45    

Expired

    (183,545 )       0.55    

Outstanding as of June 30, 2016

    15,424,464       $0.125 1.00  

 

 

The fair value of each award grant is estimated on the date of grant using the Black-Scholes option-pricing model. The determination of expense of warrants issued for services or settlement also uses the option-pricing model. The principal assumptions we used in applying this model were as follows for the six-months ended June 30:

 

 

   

2015

   

2016

 

Risk free interest rate

    0.97 1.71%

 

    1.26 1.36%

 

Expected volatility

    329 332%

 

    311 315%

 

Expected dividend yield

                   

Forfeiture rate

                   

Expected life in years

      5           5    

 

The risk-free interest rate is based on U.S Treasury yields in effect at the time of grant. Expected volatilities are based on historical volatility of our common stock.

 

Note 7. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses included the following:

 

   

December 31,

2015

   

June 30,

2016

 

Accounts payable and accrued expenses

  $ 174,539     $ 155,563  

Payroll tax liability

    137,500       137,500  

Accrued interest

    12,944       18,081  

Total accounts payable and accrued expenses

  $ 324,983     $ 311,144  

 

The payroll tax liability is the Company’s estimate of payroll taxes due on the past services of independent contractors. The Company is currently attempting to reduce the liability to approximately $5,000 through the IRS Voluntary Classification Settlement Program.

 

Note 8. Noncontrolling Interest

 

In May 2012, we formed a subsidiary for the purpose of marketing and selling medical products containing our technology, Clyra Medical Technology, Inc. (“Clyra”). Until December 17, 2012, this subsidiary was wholly-owned, with 7,500 shares issued to BioLargo, Inc. On December 17, 2012, Clyra issued 1,500 shares of Clyra common stock to a three member management team, one-third of which vested immediately, and the remaining over time. The shares granted to the three executives are restricted from transfer until a sale of the company, whether by means of a sale of its stock or substantially all of its assets, or otherwise by agreement of Clyra, BioLargo and the executives.

 

On December 30, 2015, Clyra sold 9,830 shares of its Series A Preferred Stock (“Preferred Shares”) to Sanatio Capital, LLC (“Sanatio”) for $750,000. This sale was made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and Regulation D promulgated thereunder as not involving a public offering of securities. As a result of the sale, Sanatio owns 40% of Clyra’s issued and outstanding shares, BioLargo owns 54%, and the remainder is owned by management.

 

 
13

 

 

BIOLARGO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

As set forth in Clyra’s Amended and Restated Articles of Incorporation, Preferred Shares accrue an annual dividend of 8% for a period of five years. Although the dividends begin to accrue immediately, Clyra has no obligation to declare a dividend until a product of the company has received a premarket approval by the United States Federal Drug Administration (“FDA”), or for which a premarket notification pursuant to form 510(k) has been submitted and for which the FDA has given written clearance to market the product in the United States (either, “FDA Approval”). After FDA Approval, annually on December 20, and unless prohibited by California law governing distributions to shareholders, Clyra is required to declare and pay any accruing dividends to holders of Preferred Shares then accrued but unpaid. As the declaration and payment of such dividends is contingent on an uncertain future event, no liability has been recorded for the dividends. The accumulated dividend balance as of June 30, 2016 is $30,000.

 

Holders of Preferred Shares are entitled to preferential payments in the event of a liquidation, dissolution or winding up of the company, in an amount equal to any accrued and unpaid dividends. After such preference, any remaining assets are distributed pro-rata between holders of Clyra common stock and Preferred Shares as if the Preferred Shares had converted to Clyra common stock. Holders of Preferred Shares may convert the shares to Clyra common stock initially on a one-to-one basis. The conversion formula is subject to change in the event Clyra sells stock at a lower price than the price paid by Sanatio.

 

In addition to the foregoing, Clyra entered into a consulting agreement with Beach House Consulting, LLC, through which Jack B. Strommen will be providing consulting services to the company. Mr. Strommen is the founder of Beach House Consulting, LLC. Mr. Strommen will be assisting the company in its sales and marketing activities once it has FDA Approval on a product, at which point the agreement provides that Mr. Strommen is to receive $23,438 per month for a period of four years. As of June 30, 2016, the Company has not presented any products to the FDA for FDA Approval.

 

From inception, Clyra has generated no revenues. Clyra’s operations for the three and six-months ended June 30, 2016, resulted in a net loss of $115,859 and $264,047, respectively.

 

The Company has an additional subsidiary, Biolargo Maritime Solutions, whereby if certain factors are met, a noncontrolling equity interest in this subsidiary has been pledged to its management.

 

Note 9. Commitments and Contingencies.

 

None.

 

Note 10. Subsequent Events.

 

Management has evaluated subsequent events through the date of the filing of this Quarterly Report and management noted the following for disclosure.

 

One-Year Convertible Notes

 

Subsequent to June 30, 2016, we received $250,000 and issued convertible promissory notes (convertible at $0.45 per share) with a maturity date of December 1, 2017 to two accredited investors in the aggregate principal amount of $280,000. Interest is charged upon issuance at 3% per annum. We issued to the investors stock purchase warrants to purchase an aggregate 400,000 shares exercisable at $0.65 per share, which expire five years from the date of grant. The exercise price of the stock purchase warrant may be adjusted downward in the event we sell our common stock or issue warrants at a lower price, other than through our 2015 Unit Offering. We are required to include the shares underlying the warrants in any subsequent registration statement (piggy back registration rights).

 

2015 Unit Offering

 

Subsequent to June 30, 2016, we have received subscriptions for Pricing Supplement number 4 in our 2015 Unit Offering (see Note 4) in excess of the $450,000 remaining on that pricing supplement. Over $3,000,000 has been invested in our 2015 Unit Offering. The terms of the offering require that we register the shares underlying the notes and warrants in the event aggregate investments exceed $3,000,000. We intend file a registration statement with the Securities and Exchange Commission shortly.

 

 
14

 

 

Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q of BioLargo, Inc. (the “Company”) contains forward-looking statements. These forward-looking statements include predictions regarding, among other things:           

 

 

our business plan;

 

the commercial viability of our technologies and products incorporating our technologies;

 

the effects of competitive factors on our technologies and products incorporating our technologies;

 

expenses we will incur in operating our business;

 

our ability to end persistent operating losses and generate positive cash flow and operating income;

 

our ability to identify potential applications of our technologies in industries other than the animal health industry and to bring viable products to market in such industries;

 

the application of our technologies in the food and beverage industry;

 

the willingness of other companies to incorporate our technologies into new or existing products or services and provide continued support for such products or services;

 

the ability of our licensees to successfully produce, advertise and market products incorporating our technologies;

 

the continued success and viability of our licensees holding the exclusive right to exploit our technologies in particular fields;

 

the sufficiency of our liquidity and working capital;

 

our ability to finance product field testing, hiring of personnel, required regulatory approvals, and needed patent applications;

 

continued availability and affordability of resources used in our technologies and the production of our products and services; and

 

whether we are able to complete additional capital or debt financings in order to continue to fund operations and continue as a going concern.

 

 You can identify these and other forward-looking statements by the use of words such as “may”, “will”, “expects”, “anticipates”, “believes”, “estimates”, “continues”, or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

 

Such statements, which include statements concerning future revenue sources and concentrations, selling, general and administrative expenses, research and development expenses, capital resources, additional financings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed elsewhere in this Form 10-Q, that could cause actual results to differ materially from those projected.

 

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. Unless otherwise expressly stated herein, all statements, including forward-looking statements, set forth in this Form 10-Q are as of June 30, 2016, unless expressly stated otherwise, and we undertake no duty to update this information.

 

As used in this Report, the term Company refers to BioLargo, Inc., a Delaware corporation, and its wholly-owned subsidiaries, BioLargo Life Technologies, Inc., a California corporation, Odor-No-More, Inc., a California corporation, BioLargo Water USA, Inc., a California corporation, BioLargo Development Corp., a California corporation, BioLargo Maritime Solutions, Inc., a California corporation, a Canadian subsidiary BioLargo Water, Inc., and its majority owned subsidiary Clyra Medical Technologies, Inc.

 

 
15

 

  

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this report.

 

Our Business

 

We make life better delivering sustainable technology-based products that help solve some of the most widespread problems threatening the world's supply of water, food, agriculture, healthcare and energy. We create and refine intellectual property that forms a foundation from which to build and create break-through products and technology for licensure to commercial partners. Our products harness the power of iodine – “Nature's Best Solution” – to eliminate contaminants that threaten our water, our health and our quality of life.

 

We invent, patent, prove and partner – to create best-of-class products and technology for commercialization as we build value for our shareholders and deliver benefits to our world.

 

Invent – Three Platform Technologies

 

We feature three patent protected platform technologies with diverse product opportunities across multiple industries – the AOS Filter, CupriDyne, and Isan. Each features the use of the all-natural iodine molecule. While they all use iodine, they are quite different in terms of the methods by which they exploit the use of iodine, the form and composition of iodine used, and therefore their function and value proposition can be quite different for each commercial application.

 

AOS Filter

 

The AOS Filter is our invention that combines iodine, water filter materials and electrolysis within a water filter device. Our filter generates extremely high oxidation potential in order to oxidize and break-down, or otherwise eliminate, soluble organic contaminants like acids, solvents, sulfurs, oil and gas by-products, and pharmaceutical by-products which are commonly found in all sorts of contaminated water. It also achieves extremely high rates of disinfection to eliminate infectious biological pathogens like salmonella, listeria and E.coli.

 

Extremely high oxidation potential is the key. The term ‘oxidation potential’ refers to the measure of the performance in which an oxidant is able to ‘break down’ a material through, in simple terms, the addition of oxygen and the transfer of electrons. Two commonly understood examples of oxidation are, as salt air rusts a shipyard anchor, or as fire is able to dismantle wood and turn it into ash. The key to our AOS Filter is its ability to generate extremely high oxidation potential in a continuous flow device that attacks contaminants in water that flow through the AOS Filter. The extremely high oxidation potential enables the AOS Filter to achieve performance results that researchers at the University of Alberta refer to as, ‘unprecendented’. Our AOS Filter embodies a break-through in science which led to BioLargo's co-founding of an ongoing research chair to solve the contaminated water issues associated with the Canadian Oil Sands at the University of Alberta Department of Engineering with the top five oil companies in Canada, the regional water district, and various environmental agencies of the Canadian government. Our work is continually expanding into a number of commercial applications with a key focus on food processing, agriculture and oil and gas. We are also evaluating opportunities in the maritime industry, mining, storm drain recapture / recycling, and drinking water. It is an award-winning invention that is supported with science and engineering financial support and grants from various federal and provincial agencies in Canada. The financial support is expanding along with the work to develop commercially available designs. We believe the AOS Filter has an important and substantial commercial opportunity in every segment of the water treatment industry.

 

Following extensive validation testing and refinement of the basic operating system, we have begun a commercial prototype development project, the next step leading to a product ready for commercial markets. The project will be executed in collaboration with technical personnel at the Northern Alberta Institute of Technology (NAIT)'s Center for Sensors and Systems Integration and with NAIT's Applied Bio/Nanotechnology Industrial Research Chair. With financial support provided by the Alberta Innovates nanoPDP program, this project will focus on the development of a first generation prototype system that incorporates a sensor platform to monitor various water parameters through online real-time data acquisition. This platform will be integrated with BioLargo's pre-commercial AOS reactor, and will enable further scale up and testing in industrial settings. Once this prototype development phase is complete, we intend to focus on producing multiple commercial ready pilot units for testing with various interested industrial clients and on securing regulatory approvals where required.

 

 
16

 

  

CupriDyne®

 

Our CupriDyne formula is used to deliver iodine within products. It can be delivered in any physical form, and can be combined with other ingredients, like fragrances in our odor control products, and primitive surfactants in our stain and odor products. Additional ingredients can often be added without sacrificing its practical and safe antimicrobial functions as well its oxidation potential. Our product designs include liquids, sprays, gels, powders, coatings and absorbents.

 

Safe and effective is the key. Each of our product designs delivers iodine safely, and precisely, to achieve effective broad-spectrum disinfection or odor control, depending on product design. Our primary ingredients, as well as reaction by-products, are “generally recognized as safe” (G.R.A.S) by the U.S. Food and Drug Administration as food additives in their basic forms. Its commercial product opportunities are diverse and we have an extensive menu of product designs in various stages of commercialization and licensure development, discussed in detail below in the “Commercial, Household and Personal Care Products” section. We specialize in delivering iodine, nature’s broadest spectrum and most potent disinfectant, oxidizer, catalyst, and essential nutrient, in safe, environmentally friendly, non-staining, non-toxic and effective product designs.

 

CupriDyne is unique. The iodine most of us are familiar with, sold in pharmacies and used by hospitals, has severe limitations – it is considered toxic, causes staining, and contains a limited dose of the active oxidizing ingredient. Our CupriDyne technology, on the other hand, directly addresses many of these shortcomings – it delivers iodine’s oxidizing ingredient (“free iodine”) with precision, ranging from very small doses up to very large doses with more than 20 times the power of traditional iodine. We can deliver iodine so that it is both non-toxic and non-staining, thus extending its usefulness well beyond historical product applications. Our formulations expand the functionality of our products well beyond simple disinfection.

 

Isan System

 

The Isan System is an automated iodine dosing system. It is the winner of a Top 50 Water Technology Award by the Artemis Project and a Dupont Innovation Award. Precise dosing combined with a straight-forward ‘set-it-and-forget-it’ automated computer controlled system is the key. The system features controlled measuring, flow control, dosing and iodine extraction/removal technology as well as an automatic tracking system that precisely delivers iodine in calibrated doses into a water steam or container of water. The Isan system has been proven to substantially reduce the incidence of fungal growth, spoilage, organisms and pathogens in water and on food. The system is able to operate at high flow rates.

 

First developed in Australia, the Isan system was initially registered with the APVMA (Australian Pesticides and Veterinary Medicines Authority) and FSANZ (Food Standards Australia and New Zealand) in Australia and New Zealand. The system has meaningful use and commercial value in any industry that can benefit from a precise use of iodine in water, like; agriculture, food production and processing, manufacturing, industrial water processes, irrigation supply.

 

Patent - an Expanding Intellectual Property Estate

 

We have 16 patents issued and multiple pending. We believe these patents provide a foundation from which to continue building our patent portfolio and we have reasonable basis upon which to rely on our patent protections in the field of art in which we practice. We also rely on trade secrets and technical know-how to establish and maintain additional protection of our intellectual property. As our capital resources permit, we expect to expand our patent protection as we continue to refine our inventions as well as make new discoveries. See the detailed discussion below of our patent portfolio.

 

Prove - a Continual Process

 

We have invested time and money in a wide array of third party testing, side-by-side comparisons and third party verifications to support our most important technical claims. The basic attributes of iodine are well understood by science and industry. We have evidence and experience to substantiate the following bold claims:

 

 

o

AOS Filter- when compared to the best of class competition we are

  

 
17

 

 

 

100 times more effective

 

 

less than 1/20th the cost

 

 

more than 10 times faster

 

 

o

CupriDyne

 

 

Generally Accepted As Safe (G.R.A.S.) – ingredients and by products are GRAS according to the FDA.

 

 

Potent oxidizer

 

 

Total odor elimination

 

 

Non-toxic and gentle

 

 

Increases holding power of absorbents by up to six times

 

 

Promotes rapid healing (animal care products)

 

 

De-scaling

 

 

Eliminates Sulfur, Ammonia, Fatty Acids, Mercaptans

 

 

Enhanced flocculation

 

 

Nutritive

 

 

o

Isan System

 

 

Precise iodine dosing

 

 

Anti-bacterial, anti-fungal, anti-viral

 

 

Effective against top five plant pathogens

 

 

Promotes extended shelf-life

 

 

Enhances root growth and foliage growth for healthier plants

 

Partner – a Smart Strategic Decision

 

We seek to develop commercial partnerships with other companies who will partner with us and pay us for a negotiated contractual right to use our intellectual property (patents, formulas, designs, claims, know-how, secrets), in order to expand their business for their own commercial purposes. In those instances, we seek a reasonable deposit, a minimum commitment to volume, some territorial rights, and a percentage of sales for a mutually agreeable term and territory. We believe this licensing model will prove successful and meaningful for our company.

 

We have chosen to focus on business opportunities that we believe have some combination of the following attributes: a compelling commercial advantage, our products out-perform competing products, market segments in which we have the talent and resources or opportunity to succeed in executing our business plans; and uses where we can identify a compelling cost savings or value offering to increase market share.

 

 
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We choose to pursue a licensing strategy for its obvious and well-understood high margins, potential for explosive revenue potential and capital conserving features. While this business model can also be highly dependent upon macro-economic factors like the relative stability of the national and international economy as well as cyclical nature of business, politics and climate for innovation and competing technical advances, we believe this is the most appropriate strategy for our company. We have learned from difficult and real life experience. When our commercial licensing partners are under financial pressure from macro-economic and political circumstances, including reorganizations, recapitalization, or consolidation, they hold on to capital and are less likely to take any risk for new product offerings. Timing is critically important. Companies facing circumstances beyond their management’s control are less likely to embrace any risk of innovation. Therefore, our time delays have negatively impacted our company by causing us to invest more capital, do more work, and advance our technology with nominal cash flow to support our work. However, while these delays have occurred and they were difficult, we have been able to maintain our operations, advance our scientific assets, build on our proven claims, refine our designs and we have continued to build a portfolio of both products and technology that we believe will ultimately enjoy meaningful commercial success.

 

While we have waited out many of the uncertainties of the macro-economic marketplace, we have advanced our commercial purposes and made investments in various aspects of product design, marketing and distribution, but only at an early stage and small level. In those instances, we consider these efforts to be a prelude to an ultimate licensing strategy. This strategy has been slower than we prefer. However, it has created a substantial level of diversification and breadth of potential revenue streams that we believe can and will generate meaningful revenues as they find traction in the marketplace. As we improve our access to capital, strengthen our balance sheet and can begin to generate meaningful cash flow, we believe those commercial opportunities will generate revenue for years to come as our products find their way into the marketplace.

 

In many situations, our potential licensing partners would prefer that we advance products all the way through proof of claim, manufacturing, market acceptance, well-established distribution and commercial success. While this is obvious, can be intriguing, and the relative benefits that would accrue to our valuation are clear, the risks of failure are equally high and this strategy would require substantially more capital than we have been able to secure during what many believe has been one of the most economically uncertain times in modern history. Therefore, we have chosen to invest our time and resources where we find leverage to move forward, knowing that our technical claims are proven, they are patented and that each product design has a high probability of success to find a partner and generate meaningful returns on our invested capital as our targeted licensing partners seek to deploy capital assets and begin taking advantage of our offering for their own commercial advancements.

 

Although our technology has commercial applications within many industries, we are focusing our efforts in four areas: water treatment; industrial odor control applications; commercial, household and personal care products (“CHAPP”); and “advanced wound care.”

 

Within these broad categories, we also narrow our product focus to exploit opportunities that we believe are of high-value to potential customers and that present commercially significant opportunities.

 

We have a number of examples of strategic alliance or partnering initiatives whereby we are advancing both our science, our patents, our proof of claims, field trials and our commercial opportunities. There are a number of noteworthy examples:

 

The University of Alberta

 

We are engaged in a cooperative research relationship with the University of Alberta and its researchers in Edmonton, Canada. The offices and lab of our Canadian subsidiary, and our staff researchers, are located within the University of Alberta research center at Discovery Place. We are able to utilize the extensive resources of the University and its researchers on a contract for hire basis as needed. We work closely with the Department of Agricultural, Food and Nutritional Science at the University of Alberta and its Department of Engineering, and partner with the University professors on government and industry sponsored financial awards and grants to support our ongoing research and development as we refine the AOS Filter in preparation of commercial pilots and commercial designs. Generally, the financial awards take on two common themes: first, science and engineering grants in which the University of Alberta is the primary recipient and contracting party with the grant agency to support work on and around our technology; and second, direct grants in which our Canadian subsidiary is the contracting party to support ongoing science and engineering to advance our AOS Filter towards commercialization, sometimes supporting the work of PhD students at the University. In both cases, the financial awards support much, but not all, of the research budget and related costs. Our research arrangement with the University has three high value propositions for BioLargo: (i) a depth of resources and talent to accomplish highly skilled work, (ii) financial aid to support research and development costs, and (iii) independent and credible validation of our technical claims.

 

 
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Clarion Water

 

On August 18, 2014, we entered into a manufacturing and distribution license agreement for our Isan® system with Clarion Water, a new operating division of InsulTech Manufacturing, LLC (www.insultech.com), the latter of which has over 20 years of commercial success around the globe representing hundreds of millions in sales of technical products to Fortune 100 companies.

 

Owned in equal parts by BioLargo, Inc. and Peter Holdings, Ltd. through a joint venture agreement, the Isan system leverages the power of iodine to provide the world’s most effective disinfection dosing systems. It has been referred to as one of the most important technical advancements in food safety in the past 20 years. It won a ‘top 50 water company award’ by the Artemis Project in 2010 and a DuPont Innovation Award for its excellence in science and innovation in 2004.

 

The Isan system delivers Iodine as a powerful, broad-spectrum biocide that is a logical replacement for chlorine in applications involving irrigation supply and post-harvest sanitation.  Through its automated and precise dosing system, the Isan system can help increase the quality and shelf life of fruits, vegetables, and other produce, is effective against a host of bacteria and fungi, and helps producers conform to increasingly stringent food safety regulations such as the Hazard Analysis and Critical Control Points (HACCP), which addresses food safety through the analysis and control of raw material hazards.

 

The Isan system has been validated through early stage commercialization and comprehensive testing conducted in Australia and New Zealand. Clarion intends to leverage this early work and focus initial commercialization efforts on the vast opportunities for the technology in improving plant quality and shelf life as well as explore additional opportunities for use in select industrial applications.

 

Per the terms of our license agreement, Clarion receives the exclusive global manufacturing and distribution rights to the Isan system and use of all historical data to support its commercial focus. Clarion will pay BioLargo royalties on revenue equal to 10% paid quarterly in arrears. As we jointly own the Isan System with Peter Holdings, Ltd., all royalties are shared equally with Peter Holdings. There are no minimum royalty payments for the first two years, but at year three (beginning July 1, 2016) the minimum royalties are $50,000 per quarter, at year four $75,000 per quarter, and at year five and onward $100,000 per quarter. The intellectual property subject to the license agreement includes all intellectual property related to the Isan System, including all patents, trademarks, proprietary knowledge, and other similar know-how or rights relating to or arising out of the Isan System or the patents related to the Isan System. The agreement contains other terms and conditions typically found in intellectual property license agreements.

 

BioLargo received a royalty advance of $100,000 upon execution of a letter of intent in February of 2014, which will be applied to royalties received during the first two years of the agreement. Of this advance, $45,000 was paid to Peter Holdings under our joint venture agreement. BioLargo retains certain marketing rights to help develop clients for Clarion.

 

Since licensing the technology from BioLargo in August 2014, Clarion has completed a comprehensive technical and engineering update to the Isan System, featuring a new automated touch screen user interface, enhanced security, enhanced control features for increased monitoring and sensing, and adding automated functionality providing users unmatched flexibility, reliability and control over this state-of-the-art disinfectant delivery system, and begun commercial trials. In 2015, it filed application with the U.S. Environmental Protection Agency, which application is pending as of the date of this report.

 

Downeast Logistics

 

In late 2013, we entered into a cooperative selling and distribution agreement with Downeast Logistics, a certified “Service-Disabled Veteran-Owned Small Business” (SDVOSB), as our distribution partner to facilitate our first order to the US Government. Downeast has been instrumental in developing ongoing sales to the United States Military. We have six products with National Stocking Numbers. In March 2015 we secured a $150,000 “Indefinite Delivery Purchase Order” (IDPO) for the purchase of our Specimen Transport Solidifier pouches by the U.S. Defense Logistics Agency (DLA). The purchase order allows the DLA to purchase the product at agreed-upon prices for the following 12 months. In exchange, the company is awarded the contract to be the exclusive supplier of the designated product under the IDPO. During the period of the contract, approximately $30,000 in product was ordered.

 

 
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In March 2016 two of our product lines (consisting of 9 SKUs) of Nature’s Best Science products were awarded a five year U.S. General Services Administration (GSA) supply contract, under schedule 65IIA for medical equipment and supplies. The award opens up access to these products through “GSA Advantage”, the online shopping and ordering system that provides government agencies access to thousands of contractors and millions of supplies (products) and services. We intend to apply for inclusion of additional existing and future products into GSA Advantage.

 

Downeast Logistics has operated for more than thirteen years, and will continue to offer our products through multiple channels of the US Government. Its designation as a SDVOSB places Downeast Logistics within a group of highly sought after vendors to the US government. Odor-No-More has registered, and is in the process of registering, itself as well as its products with several procurement agencies of the US Government.

 

Industrial Odor Control - CupriDyne Clean

 

In 2015, we were invited by a number of potential customers to design a product for the industrial odor control industry segment and to begin trials for an odor control product in large scale operations. As a result of these efforts, we have branded a liquid product “CupriDyne Clean”, a non-staining and colorless blend of micronutrients designed for odor control. It is available in various sizes for industrial uses and is ideal for waste transfer stations, composting facilities, landfill operations, sewage plants and lift stations, food processing plants and animal enclosures. It is dispensed through atomization systems and is safe and effective on a host of surfaces including soils, metals, concrete and asphalt docks, floors, walls, feed and water receptacles, waste receptacles, tanks, bins, liners and dumpsters. 

 

Since 2015, we have and continue to refine the product design, its claims, and marketing and selling plans. Our product web site can be seen at www.cupridyne.com. Based on our test marketing and trials, we believe that many industries that must contend with odors that include hydrogen sulfide, ammonia, fatty acids, sulfur compounds, or mercaptans, are dissatisfied with the current competing odor control products, place a high value on odor control solutions that actually work, and are anxious to test and trial new products like our CupriDyne Clean as they search for a solution to these common and troublesome odor problems. We have been told by prospective customers and experts from these markets that effective odor control for these prospective customer groups is in among the top on a list of priorities in their daily operations and their commitment to serve their local communities where they operate.

 

We intend to further develop our products, refine our free trial program, attend industry conferences, join trade associations, advertise, and recruit leaders from these industries to help us refine, focus and break through to commercial success. We are highly encouraged by this early work and the welcome response from new prospects from industry. In May 2016, we secured our first orders for CupriDyne Clean for the use at a Southern California waste handling facility. We now have multiple customers and continue to expand our free trial program. While the success of these efforts cannot be assured, we are confident and highly encouraged to focus and invest time, energy, staff and capital in this area as resources permit.

 

Multinationals and Mid-Level Industry Participants

 

We began discussions about our AOS Filter with a number of multi-nationals as well as regional companies in 2014 and 2015 that are continuing.  We held our first technical symposium in August 2015 where we had more than 30 attendees representing industry, academia and funding agencies. We are planning another technical symposium this August of 2016 to showcase the refinements, data showing efficacy and the first commercial prototype being designed and assembled by the Northern Alberta Institute of Technology.  We have entered into technical non-disclosure agreements with a wide variety of companies to evaluate our AOS Filter and discuss potential strategic alliances. Many of these continue to monitor our technical progress and have expressed interest in the technology and potential strategic alliances as we finalize our commercially ready design. The claims we have put forth are well received.  The focus of discussions in most cases has moved from efficacy, which is accepted, to a business case discussion relative to capital and time to market and the potential return on investment. While these discussions are ongoing, we continue to advance our science and proven claims. We are highly encouraged that our AOS Filter has an important role in commerce.

 

 
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We believe there are a number of potential partners interested in working with us to exploit the commercial opportunities associated with the AOS Filter technology. These opportunities are limited by common and obvious limitations, capital, the relative state of development and market readiness and, adoption rates in the marketplace. Given the significant value offerings, namely enhanced performance and lower cost, we believe we will be able to find industry partners to assist in commercialization of the AOS Filter and are committed to pursue success in these markets.

 

Commercial, Household and Personal Care Products

 

CHAPP includes broad product categories and many opportunities for the application of our technology. It is defined by the ability to utilize similar, if not identical, consumption products in multiple market segments. Detergents, single use absorbents, wipes, products that provide odor or disinfection control, and stain removal all fall within this category. Packaging ranges from consumer sizes of a few ounces to bulk packaging for commercial or industrial use. We are currently marketing products in this category under four brands – Odor-No-More, Nature’s Best Solution, Deodorall, and NBS - direct to consumers, through retail stores, and most recently, to the U.S. Government. 

 

We are continuing our efforts to generate “private label” clients. We have fulfilled some small orders for various products that we produced under a third party’s private brand. We are meeting with new potential customers for private label opportunities. We also are in discussions with potential strategic alliance partners to provide large scale manufacturing and distribution should we secure orders for the private label business opportunities. We have a few opportunities that could expand to become large customers for our company. Success in these markets is highly dependent upon the willingness of the potential partners to invest in product support to continue marketing and expanding customer awareness.

 

Our sales in the CHAPP product category are nominal. Product development, sales, and marketing require significant financial resources that we currently do not have. As such, our progress in this area has been slower than we had hoped. We are marketing the technology for licensure to established companies in this industry segment, as the opportunities present themselves through our various independent agents and our key industry contacts, and we are continuing to expand our proof of claims and product designs for various odor and moisture control applications.

 

Advanced Wound Care – Clyra Medical Technologies Subsidiary

 

In 2012 we formed a subsidiary Clyra Medical Technologies, Inc. (“Clyra”) to commercialize our technology in the medical products industry, with an initial focus on advanced wound care. Our advanced wound care products combine broad-spectrum antimicrobial capabilities with iodine’s natural and well-understood metabolic pathway to promote healing. Our products are highly differentiated by the gentle nature in which they can perform. We believe these benefits, along with reduced product costs as compared with other antimicrobials, give our products a competitive advantage in the marketplace.

 

In December 2015, we completed a financing transaction through which $750,000 was invested into Clyra in exchange for preferred stock comprising 40% of the total issued and outstanding shares. The investor committed to fund a $5,000,000 operating line of credit once Clyra’s initial products receive FDA Approval.

 

 
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With new funding in place, Clyra re-initiated product development and testing for its wound gel and wound cleaner products with experts and well established contract manufacturing companies from industry. It intends to apply for FDA 510(k) approval for these two products to be sold into the advanced wound care industry. While no assurances can be made about the ultimate success any FDA applications once filed, given the forward looking nature of such events, Clyra has retained and engaged a team of experts in the area to guide it through the process.  Given the timing of the FDA process, and the requirement for approval before product can be sold, we do not anticipate product sales until 2017. In the interim, we will continue to refine our products, their roll out, marketing, and distribution plans. A U.S. patent was recently issued for these products under development and we intend to continue expanding patent coverage as we refine our products, as available. We are also evaluating potential product designs where our current product designs can be used or slightly modified/ enhanced to create new products for new medial related markets like dental, veterinary medicine, over the counter applications and the like.

 

BioLargo Maritime Solutions, Inc.

 

We formed BioLargo Maritime Solutions, Inc. to organize and evaluate business opportunities in and around the maritime industry for our technologies, including our AOS filter. Assuming we elect to move forward in the future, we will need to organize a strategy and additional resources, including capital and proper staffing to pursue business opportunities in and around the maritime industry that would incorporate BioLargo technologies. This subsidiary is not yet operational.

 

 

 

Results of Operations—Comparison of the three and six-months ended June 30, 2016 and 2015

 

Revenue

 

Our revenue from product sales totaled $38,986 and $52,928 in the three and six-months ended June 30, 2016, compared with $15,611 and $29,486 for the three and six-months ended June 30, 2015, respectively. Our product revenue consisted primarily of sales of our Specimen Transport Solidifier pouches to the U.S. Defense Logistics Agency, our CupriDyne Clean industrial odor control product to the waste management industry, and our Odor-No-More branded animal bedding additive to horse stables and a farming retailer.

 

During the three months ended June 30, 2016, we received our first orders for our CupriDyne Clean industrial odor control product to the waste management industry. We have multiple customer trials ongoing and are focused on expanding our customer base and trial program, and increasing our revenues for this product.

 

Other Income

 

During the three and six-months ended June 30, 2016, income received from Canadian grant agencies increased $19,106 and $45,068 over the three and six-months ended June 30, 2015. We anticipate income received from grants to increase at this same rate for 2016. Our wholly owned Canadian subsidiary has been awarded a total of 11 research grants, from the Canadian National Research Institute – Industrial Research Assistance Program (NRC-IRAP) and the National Science and Engineering Research Council of Canada (NSERC). The government grants received are considered reimbursement grants related to costs we incur and therefore are included as Other Income on our income statement. The total value of grants previously awarded as of the date of this Report is approximately $900,000, although not all of the grant funds are to be paid directly to us nor will all the funds be considered as income in our financial statements.

 

Cost of Goods Sold

 

Our cost of goods sold includes costs of raw materials, contract manufacturing, and proportions of salaries and expenses related to the sales and marketing efforts of our products. Because we have not achieved a meaningful product revenue base, and our number of products is increasing, the inclusion of the fixed costs related to the product development and manufacturing increases our cost of goods disproportionately, resulting in high percentage fluctuations. 

 

Selling, General and Administrative Expense

 

Our Selling, General and Administrative (“SG&A”) expenses include both cash and non-cash expenses. Our total SG&A increased by $64,296 (7%) and $434,678 (31%) in the three and six-months ended June 30, 2016 compared to the same periods in 2015. The increase is due primarily to a non-cash expense associated with the extension of the expiration dates of stock options issued in 2011 in lieu of board of director and consultant/vendor payables and non-cash expense associated with stock issuances for consultant services.

 

 
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The largest components of our selling, general and administrative expenses for the three and six-months ended June 30, 2015 and 2016 were:

 

   

THREE MONTHS

   

SIX-MONTHS

 
   

JUNE

30, 2015

   

JUNE

30, 2016

   

JUNE

30, 2015

   

JUNE

30, 2016

 
                                 

Officer salaries and payroll-related expenses

  $ 126,175     $ 123,842     $ 252,350     $ 251,349  

Consulting expense

    311,362       286,579       416,358       588,880  

Professional fees

    103,326       147,352       214,771       291,605  

Board of director expense

    82,700       85,500       150,200       236,552  

 

 

Research and Development

 

Research and development expenses increased $162,757 (97%) and $375,808 (123%) for the three and six-months ended June 30, 2016, as compared to the same periods in 2015. In December 2015, $750,000 was invested into our subsidiary Clyra Medical Technologies for the purpose of concluding the development of its advanced wound care products. The increase in research and development expenses is a result of increased activity at Clyra due to this investment, and increased activities at our research facility at the University of Alberta due in part to an increase in grant funding.

 

Interest expense

 

Interest expense increased $175,606 and $567,777 for the three and six-months ended June 30, 2016, as compared to the same periods in 2015. Our interest expense increased significantly because of the increase in notes and the amortization of the discount on the warrants issued in our 2015 Unit Offering. At the start of 2015, we had only $250,000 in outstanding promissory notes. This number increased by almost $3,000,000 during 2015 and is now above $4,000,000.

 

Net Loss

 

Net loss for the three and six-months ended June 30, 2016 was $1,668,335 and $3,312,728, a loss of $0.02 and $0.04 per share, compared to a net loss for the three and six-months ended June 30, 2015 of $1,299,968 and $1,995,086, a loss of $0.02 and $0.02 per share. The increase in net loss is primarily due to the increase in interest expense related to the amortization of the discount recorded on our convertible notes payable and the non-cash expense related to the five-year extension of the expiration date of stock options issued in lieu of salary and consultant/vendor payables, originally issued in 2011.

 

Liquidity and Capital Resources

 

We have been, and anticipate that we will continue to be, limited in terms of our capital resources. Until we are successful in commercializing products or negotiating and securing payments for licensing rights of our technologies, we expect to continue to have operating losses. Cash totaled $889,029 at June 30, 2016. We had working capital of $592,391 as of June 30, 2016, compared with negative working capital of $545,517 as of June 30, 2015. During the six-months ended June 30, 2015 and 2016, we used cash flow from operating activities of $813,362 and $1,693,661, respectively.

 

The differences from period-to-period in our net cash used in operating activities are dependent on our cash position during the period. If we have sufficient cash reserves from financing activities, we typically pay employees and vendors a larger portion in cash. This was the case in the six-months ended June 30, 2016. Otherwise, we issue common stock or options to purchase common stock to compensate employees and vendors the remainder of what they are owed. We do so at the end of the quarter. When we issue options, we do so pursuant to a plan adopted by our board of directors that allows us to set a price based on the trading price of our common stock. The options we issue have a fair value greater than the cash owed, and that fact increases our non-cash expense.

 

 
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We generally have not had enough cash or sources of capital to fully fund operations or accounts payable and expenses as they arise. The short-term demands on our liquidity consist of our obligations to pay our employees, consultants, and for other ongoing operational obligations, including research and development activities in Canada and in our medical subsidiary. We typically pay only a portion of these obligations in cash, and the remainder by the issuance of common stock or options pursuant to the accounts payable conversion plan approved by our board of directors. We will be required to raise substantial additional capital to expand our operations, including without limitation, hiring additional personnel, additional scientific and third-party testing, costs associated with obtaining regulatory approvals and filing additional patent applications to protect our intellectual property, and possible strategic acquisitions or alliances, as well as to meet our liabilities as they become due for the next 12 months. We have been, and will continue to be, required to financially support the operations our subsidiaries, none of which are operating at a positive cash flow. Only one subsidiary, Clyra, has financing in place to fund operations for the remainder of the year.

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the accompanying financial statements, we had a net loss of $3,312,728 for the six-months ended June 30, 2016, and an accumulated stockholders’ deficit of $87,266,592 as of June 30, 2016. The foregoing factors raise substantial doubt about our ability to continue as a going concern. Ultimately, our ability to continue as a going concern is dependent upon our ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations by licensing or otherwise commercializing products incorporating our technologies. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

As of June 30, 2016, we had $3,795,502 principal and interest amount outstanding due on convertible notes payable (see Note 4) that are payable into shares of our common stock at our option on the June 1, 2018 maturity date. We also had $303,551 principal and interest amount outstanding due on letter of credit (see Note 4) that are payable December 1, 2017. Additionally, we had $293,063 of accounts payable and accrued expenses (see Note 7).

 

In addition to our 2015 Unit Offering, we are continuing to explore numerous alternatives for our current and longer-term financial requirements, including additional raises of capital from investors in the form of convertible debt or equity. There can be no assurance that we will be able to raise any additional capital. No commitments are in place as of the date of the filing of this report for any such additional financings. Moreover, in light of the current unfavorable economic conditions, we do not believe that any such financing is likely to be in place in the immediate future.

 

It is also unlikely that we will be able to qualify for bank or other financial institutional debt financing until such time as our operations are considerably more advanced and we are able to demonstrate the financial strength to provide confidence for a lender, which we do not currently believe is likely to occur for at least the next 12 months or more.

 

If we are unable to raise sufficient capital, we may be required to curtail some of our operations, including efforts to develop, test, market, evaluate and license our BioLargo technology. If we were forced to curtail aspects of our operations, there could be a material adverse impact on our financial condition and results of operations.

 

Critical Accounting Policies  

 

Our unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 30, 2016, in the Notes to the Consolidated Financial Statements and the Critical Accounting Estimates sections. In addition, refer to Note 2 to the consolidated interim financial statements included in Part I, Item 1 of this report.

 

 
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The methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results of the Company reports in its financial statements.

 

It the Company’s policy to expense share based payments as of the date of grant in accordance with Auditing Standard Codification Topic 718 “Share-Based Payment.” Application of this pronouncement requires significant judgment regarding the assumptions used in the selected option pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking expectations projected over the expected term of the award. As a result, the actual impact of adoption on future earnings could differ significantly from our current estimate.

 

Recent Accounting Pronouncements

 

None.

 

Item 4.

Controls and Procedures

 

We conducted an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report.

 

Our procedures have been designed to ensure that the information relating to our company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure. Based on this evaluation, our chief executive officer and chief financial officer concluded that as of the evaluation date our disclosure controls and procedures are effective.

 

It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 
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PART II

 

OTHER INFORMATION

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Stock Issued for Services

 

During the three-months ended June 30, 2016, we issued 548,819 shares of common stock resulting in a weighted-average fair value of $201,574. The common stock was issued for services provided by consultants and is recorded in selling general and administrative expense in our consolidated statement of operations.

 

On June 30, 2016, we issued 263,918 shares of common stock to holders of our 2015 Unit Offering notes, resulting in a weighted-average fair value of $114,363. These shares were issued as payment of accrued interest and is recorded as interest expense in our consolidated statement of operations.

 

Issuance of Stock Options in exchange for payment of payables

 

On June 30, 2016, we issued options to purchase 162,406 shares of our common stock at an exercise price of $0.45 per share to our board of directors and vendors in satisfaction of accrued and unpaid obligations totaling $109,002 recorded as selling, general and administrative expenses. 

 

On June 20, 2016, we recorded the issuance of options to purchase an aggregate 40,000 shares of our common stock to the non-employee members of our Board of Directors, pursuant to the terms of the 2007 Equity Plan which calls for an annual automatic issuance. The exercise price of $0.45 equals the price of our common stock on the grant date.

 

2015 Unit Offering

 

During the three months ended June 30, 2016, we received an aggregate $280,000 and issued convertible promissory notes with a maturity date in June 1, 2018, which accrue interest at a rate of 12% per annum, and are convertible into our common stock at $0.35 per share. Each investor, for no additional consideration, received a stock purchase warrant exercisable at $0.45 per share, which right terminates June 1, 2020. We issued warrants to purchase an aggregate 800,000 shares.

 

Line of Credit

 

On June 6, 2016, we received $300,000 pursuant to a line of credit, accruing interest at a rate of 18% per annum, for which we have pledged our inventory and accounts receivable as collateral. The line of credit may be repaid following six-months from the date of issuance or at the maturity date December 1, 2017.

 

Each investor, for no additional consideration, received a warrant. (See Note 6). The warrant allows for the purchase of the number of common shares equal to the investment amount. (e.g., one warrant share for dollar of letter of credit). We issued warrants to purchase an aggregate 300,000 shares of our common stock. These warrants are exercisable at $0.35 per share and expire June 2021. The intrinsic and relative fair value of warrants issued resulted in $237,405 discount on the letter of credit.

 

All of these offerings and sales were made in reliance on the exemption from registration contained in Section 4(2) of the Securities Exchange Act and/or Regulation D promulgated thereunder as not involving a public offering of securities.

 

 

 
27

 

 

Item 5.

Other Information

 

As of the date of this report, we have received an aggregate $3,206,713 investments in our 2015 Unit Offering. The terms of the offering require we file a registration statement with the SEC registering the shares issuable upon conversion of the notes and exercise of the warrants in the event investments exceed $3,000,000. We intend to begin the process of filing a registration statement shortly.

 

Item 6.

Exhibits

 

The exhibits listed below are attached hereto:

 

       

Exhibit No.

  

Description

 
     

       4.1* Form of One-Year Convertible Promissory Note

       4.2* Form of Five-Year Stock Purchase Warrant (issued with One-Year Convertible Note)

       4.3* Line of Credit issued June 2016
       4.4* Stock purchase warrant issued with Line of Credit in June 2016
     

31.1*

  

Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).

 
     

31.2*

  

Certification of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C. Section 1350

 
     

32**    

  

Certification of Chief Executive Officer and Chief Financial Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).

 

101.INS**

 

XBRL Instance

 

 

 

 

 

101.SCH**

 

XBRL Taxonomy Extension Schema

 

 

 

 

 

101.CAL**

 

XBRL Taxonomy Extension Calculation

 

 

 

 

 

101.DEF**

 

XBRL Taxonomy Extension Definition

 

 

 

 

 

101.LAB**

 

XBRL Taxonomy Extension Labels

 

 

 

 

 

101.PRE**

 

XBRL Taxonomy Extension Presentation

 

* Filed herewith

** Furnished herewith

  

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

Date: August 15, 2016

 

BIOLARGO, INC.

 

 

By: /s/ DENNIS P. CALVERT

   

Dennis P. Calvert

Chief Executive Officer

     
     

Date: August 15, 2016

 

By: /s/ CHARLES K. DARGAN, II

   

Chief Financial Officer

 

 
28

 

  

EXHIBIT INDEX

 

 

     

Exhibit No.

 

Description

     

        4.1* Form of One-Year Convertible Promissory Note

        4.2* Form of Five-Year Stock Purchase Warrant (issued with One-Year Convertible Note)

        4.3* Line of Credit issued June 2016

        4.4* Stock purchase warrant issued with Line of Credit in June 2016

     

31.1*

 

Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).

     

31.2*

 

Certification of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C. Section 1350

     

32**    

 

Certification of Chief Executive Officer and Chief Financial Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).

101.INS**

 

XBRL Instance

 

 

 

101.SCH**

 

XBRL Taxonomy Extension Schema

 

 

 

101.CAL**

 

XBRL Taxonomy Extension Calculation

 

 

 

101.DEF**

 

XBRL Taxonomy Extension Definition

 

 

 

101.LAB**

 

XBRL Taxonomy Extension Labels

 

 

 

101.PRE**

 

XBRL Taxonomy Extension Presentation

 

* Filed herewith

** Furnished herewith

 

 

29